Bad news for the Big Four in China | China Accounting Blog | Paul Gillis

Bad news for the Big Four in China

The CICPA has issued their annual rankings of Chinese CPA firms for 2013. It is bad news for the Big Four. BDO’s Chinese affiliate Lixin jumped over both KPMG and EY to kick EY out of the Big Four in China. RSM and Crowe Horwath’s shared affiliate Ruihua pushed KPMG out when it passed both EY and KPMG last year. PwC continues to be the largest CPA firm in China, extending its lead over Deloitte. PwC’s growth was a modest 4%, while Deloitte actually shrunk by 5%.

Here are the top ten CPA firms in China in 2013:

In most parts of the world the top accounting firms release information on their performance. Although they are private companies, they are public interest entities and the public deserves to look in their drawers just as they look into everyone else's. In China and Hong Kong, however, the Big Four are intensely secretive about their operations. The CICPA data is the only look inside. I believe that the data are generally reliable. It is used by the CICPA to set dues, so cheating upward would be expensive, and cheating downward could risk their right to practice. The revenue includes only audit fees. The Big Four operate their consulting practices in WFOEs and local firms report consulting revenues separately.

The Big Four have been in a slump since 2008. Local firms grew 14.5% in 2013, their slowest growth in a decade. The Big Four (international version) managed only 2.8% growth in China, well below the growth in China’s GDP of 7.7%.

It was a tough year for the Big Four, especially on the regulatory front with Chinese, Hong Kong, and US regulators all zeroing in on them. Audit rotation among the big SOEs took a big whack out of Big Four growth; while they did not lose many big clients the fees were significantly reduced. An improved US and Hong Kong IPO market should help the firms record better results in 2014.

The future does not look bright for the Big Four in China. I expect capital markets to continue to migrate to the Chinese stock exchanges, meaning fewer U.S. and Hong Kong IPOs that the Big Four historically dominate. Other than dual listed companies, the Big Four have a nearly insignificant market share of domestically listed companies. Multinationals, which the Big Four dominate, are also taking a beating in China, likely making it harder for the Big Four to make up the difference from their core international clients.

The Big Four had better find their game soon. If the trends of the past five years continue, China may be the place where the Big Four are beaten by the second tier.

Copyright 2020 Paul L. Gillis all rights reserved